6. The table below is a set of hypothetical production possibilities for a nation.

Question

Combination Automobiles(thousands) Beef (thousands of tons)
A 0 10
B 2 9
C 4 7
D 6 4
E 8 0

a) Plot the production possibility data. What is the opportunity cost of the first 20000 cars produced? Between which points is the opportunity cost per thousand automobiles highest? Between which points is the opportunity cost per thousand tons of beef highest?

c) Does this production possibilities curve reflect the law of increasing opportunity cost? Explain.

d) What assumptions could be changed to shift the production possibilities curve?

Answer 1

a) To plot the production possibility data, you would create a graph with the x-axis representing automobiles and the y-axis representing beef. Then plot the points A(0,10), B(2,9), C(4,7), D(6,4), and E(8,0).

For the opportunity cost of the first 20,000 cars produced, you need to compare the production between points A and B. At point A, no cars are produced and 10,000 tons of beef are produced. At point B, 2,000 cars are produced and 9,000 tons are produced. So, the opportunity cost of producing the first 20,000 cars is 1,000 tons of beef.

The opportunity cost per thousand automobiles is highest between points C and D because it costs 3,000 tons of beef to produce 2 more thousand automobiles. The opportunity cost per thousand tons of beef is highest between points A and B as one thousand tons of beef would cost 2,000 automobiles.

c) Yes, this production possibilities curve reflects the law of increasing opportunity cost. The law states that as production of one good increases, the opportunity cost of producing it also increases. As we move along the curve from A to E, we can see that the opportunity cost of producing automobiles increases, as does the opportunity cost of producing beef. This is due to the fact that resources become less suited for one type of production as more of that good is produced.

d) There are several assumptions that could be changed to shift the production possibilities curve:

1. Improvements in technology: If the technology used to produce automobiles or beef becomes more advanced, the production possibilities curve would shift outward, allowing the nation to produce more of both goods.

2. Increases in resources: If there were more resources available for the production of automobiles or beef (e.g. more land, labor, or capital), the production possibilities curve would also shift outward.

3. Efficiency improvements: If the efficiency of production for automobiles or beef increases, the nation could produce more of both goods without using additional resources, and the production possibilities curve would shift outward.

4. Changes in consumer preferences: If consumer preferences shift, causing people to demand more automobiles or beef, the nation would likely allocate more resources towards the production of the preferred good, which could shift the production possibilities curve in the direction of the demanded good.